Order 636 Principles Needed in Power Market
A principle that was the cornerstone of FERC's landmark gas
restructuring rule, Order 636, is absent from Order 888 and is at
the root of many of the reliability problems in the bulk power
market, say industrial power customers and a utility/marketer.
The Commission recognized "so astutely" in Order 636 that
comparability of service and pricing for similarly-situated
customers was the "linchpin for overcoming both competitive and
reliability challenges" in the natural gas industry, said
affiliates Dynegy Power Marketing, Dynegy Power Corp. and Illinois
Power Co. That "piece of the puzzle," however, is missing from the
wholesale power market.
Order 636, which came out in 1992, "engineered.....a
comprehensive retooling of the natural gas market," giving
customers access to sufficient supplies of gas at reasonable
prices, the Dynegy affiliates said; but that wasn't so in Order
888. FERC "cannot postpone any longer the implementation (or at
least a fuller discussion)" of initiatives to assure similar access
and sensible prices for electric customers, they noted.
Likewise, the Electricity Consumers Resource Council (ELCON),
the American Iron and Steel Institute and the American Chemistry
Council (Industrial Consumers) believe FERC "should go beyond mere
behavioral rules for checking the discriminatory conduct of
transmission owners by adopting the electricity equivalent of Order
Specifically, the Commission should "respond affirmatively" to a
March 1998 filing in which petitioners proposed that FERC "divorce"
regulated transmission owners from their affiliated merchant
operations, forcing the merchant facilities to "seek and obtain
transportation pursuant to identical rules.....that govern all
other shippers," the Industrial Consumers said.
Imposing this Order 636-like strategy in the electric industry
"is even more essential because the degree of vertical integration
of the incumbent utilities makes the incentive and opportunity to
discriminate much greater than it was in the less-integrated
natural gas industry," the group noted. "FERC must undo many of the
consequences of 65 years of regulation for real competition to
emerge" in the wholesale power market.
The Dynegy and ELCON comments were in response to the
Commission's two-part request in May for industry suggestions on
short- and long-term initiatives for enhancing the reliability of
the power grid. Industry filed comments at FERC on ways to improve
reliability in the short term in early June, while the deadline for
proposals addressing long-term reliability was a week ago
Dynegy and ELCON cautioned the Commission against looking to
regional transmission organizations (RTOs) as a cure-all for
reliability problems. RTOs "are not the panacea to the industry's
ills.....[E]ven if the Commission mandated RTO formation, it would
still fall well short of addressing the market disparities and the
fundamental inequities resulting from the lack of comparable access
to transmission service for all market participants," the Dynegy
affiliates noted. For instance, they said RTOs would do little to
stop transmission owners from hiding their "discriminatory behavior
behind the cloak of native load."
FERC's prior policy on independent system operators (ISOs) and
its voluntary rule on RTOs are failing, contends ELCON.
"Reliability problems (and irrational pricing conditions) are just
as (if not more) endemic of existing ISOs than regions that are not
served by ISOs."
In a white paper filed at FERC, the Electric Power Supply
Association (EPSA) cautioned the Commission against letting RTOs
actively involve themselves in competing generation markets, saying
this could further jeopardize the "reliability and stability" of
the markets in the long term. RTOs should stick to operating
transmission systems in a reliable, non-discriminatory manner, the
Unfortunately, however, nearly all of the existing ISOs - the
California ISO, the PJM Interconnection, the New England ISO and
the New York ISO - "have shown that they are inclined to take on a
significant role in power markets, which can preempt private market
development," the group of energy suppliers noted. Their
intervention is mostly seen in the form of price caps on
generation, EPSA said.
Every operational ISO has invoked price caps this summer. "Price
caps mute price signals that would generate capital to build
generation. Indeed, the mere rumor that the Commission was
considering national price caps for generation a few weeks ago
caused an almost $8 billion exodus in capital from generator stocks
in two days," the Dynegy affiliates noted. Dynegy stock was among
those affected by the rumor.
While FERC has given industry "some guidance" on the issues
influencing reliability, "some of it is dated, some of it is
sketchy, and some of it is unclear and subject to
misinterpretation," the Dynegy affiliates said. "Fortunately,
however, serious (and surprisingly candid and progressive)
discussion on these issues is taking place as market participants
meet to decide their RTOs. Indeed, momentum is growing in some
parts of the industry to move decidedly away from contract path,
after-the-fact pricing [for transmission] and to a model where
power can be bought and sold in a forward market through the use of
hedging tools that provide price certainty. These discussions are
occurring largely without the benefit of Commission participation."